SKF First-quarter report 2022: Strong growth with improved industrial margin

Rickard Gustafson, President and CEO:

“In the first quarter, we managed to deliver strong results and growth in an external environment characterized by supply constraints and big uncertainties following the war in Ukraine and the Covid-situation in China.

Organic growth in the quarter was 6.5%, driven by strong sales in most regions. The growth in Industrial was very strong with 11%, while Automotive was down by -3%. Net sales were SEK 22,942 million (19,865). It is encouraging to see that several of the segments that we identified as high-growth areas in our strategic framework had a strong first quarter with double-digit growth. Key examples being high-speed machinery, industrial distribution, agriculture, food & beverage and automation.

The adjusted operating profit improved to SEK 3,058 million (2,789). During the first quarter we were able to successfully compensate for cost increases on raw material and components. I’m pleased with the accelerated price realization we’ve secured so far, but we will continue to drive price relentlessly to mitigate cost inflation.

Our Industrial business delivered a very strong result, with an improved adjusted operating margin of 16.5% (16.3%). Clearly, our competitive offerings are contributing to strong profitable growth in combination with effective measures to mitigate the cost inflation.

Also, our Automotive business performed relatively well during the quarter given the circumstances. Supply chain volatility and continued OEM production delays resulted in lower sales, reduced productivity, and a build-up of inventories. On the positive side, demand for electrical vehicles and the vehicle aftermarket remained strong. All in all, the adjusted operating margin came in at 5.2% (8.9%), which I consider to be acceptable in a volatile automotive market.

Cash flow from operations in the quarter was SEK -271 million (131), which is not satisfactory and something that we’re acting on. The negative development was driven by increased inventories, supply and logistics constraints. In China, for example, we were not able to fully deliver our products to customers due to Covid lockdowns.

We see good progress when it comes to implementing our new strategic framework. During the quarter, there has been an increased demand for magnetic technology and hydrogen solutions. Within our service offering, we’ve announced a partnership with Amazon Web Services, aiming to take scalability of condition monitoring and data analysis to a new level.

The Russian invasion of Ukraine has a severe effect on our operations in both Ukraine and Russia. As a direct consequence, we’ve concluded that it’s impossible for us to continue our operations in Russia, as the basis and stability for our business does not exist. Therefore, and as previously communicated, we’re planning for a rapid and controlled exit from the Russian market. As a direct consequence, a write down of SKF’s financial assets totaling SEK 500 million will be made during the second quarter. In Ukraine we continue to be operational whenever possible given the prevailing circumstances, however at a lower level than normal.

Looking into the second quarter of 2022, there are continued uncertainties with supply constraints, implications from the war in Ukraine and the Covid-situation in China, which will continue to affect our operations. We anticipate organic sales to grow in Industrial, while organic sales in Automotive most likely will decline. We expect organic sales for the second quarter to be relatively unchanged compared to previous year. For the full year 2022, we expect an organic sales growth of about 4-8%, accounting for our planned exit from Russia.

In these very difficult external circumstances, I’m impressed and proud of all the hard work from SKF employees in all geographies in supporting each other, our customers and safeguarding our business.”